Spanish Tax Saves Money
March 27th, 2008
If you reside in Spain for more than 183 days in any Spanish tax year then you are obligated to pay your taxes to the Spanish tax authority on your worldwide income, gains and wealth. You do not have an option.
In addition, your assets may be liable to Spanish succession tax and if you remain a UK domicile, your worldwide assets will also be subject to UK inheritance tax (IHT), with double tax relief as appropriate. You always remain liable for IHT on assets located in the UK.
Spanish savings income is taxed at a fixed rate of 18% and basically covers your worldwide income from dividends, interest, life assurance contracts, purchased annuities and capital gains on the sale or transfer of assets.
Income not categorised as ‘savings’ income is taxed as ‘general’ income and includes all earned income such as that from salary, self-employment, pension, and rental income. General income is taxed over four income bands at the progressive scale rates from 24% to 43%.
It is interesting to note that anyone with funds in offshore accounts including the Isle of Man, Jersey or Guernsey who are paying the withholding tax under the Savings Tax Directive (STD) will soon be paying more in withholding tax than if the income were taxed in Spain. From July this year the STD withholding tax rate increases 33% from 15% to 20%. In 2011 it will rise even further to 35%, a massive hike of 133% from the initial 15% rate!
You can arrange for your bank to stop deducting tax and instead annually provide the Spanish tax authorities with information about your interest earnings. You would then declare the income on your Spanish tax return and pay 18% tax in Spain.
Even if you are paying the withholding tax, you are legally obliged to declare the interest earnings on your Spanish tax return, and also the capital for wealth tax purposes. Some people don’t realise they have to do this. If you have not been declaring the offshore interest for whatever reason, it is worthwhile taking professional advice rather than suddenly start to declare the income to the Spanish authority and have to explain why it was not declared previously.
Spanish succession tax (SST) is a tax on inheritance and gifts. It is paid by each beneficiary, providing the recipient is resident in Spain or the assets being gifted or inherited are located in Spain.
SST is set by the State but each region can vary the rules, rates and allowances to make them more favourable than the State rules. The regional rules will only apply if the deceased was habitually resident there for the preceding five years. In Valencia, the 99% reduction on the tax payable for direct line relatives only applies if both the donor and recipient were habitually resident for five years.
There is no blanket exemption between spouses as there is in the UK. Where a married couple are both resident in Spain, and one spouse dies, then the other spouse can be fully liable on the worldwide assets inherited from the deceased spouse.
Beneficiaries are divided into the four groups depending on the closeness of relationship to the donor or the deceased and the SST allowances differ for each group. The basic tax-free State allowance for close relatives and spouses is €15,956 and €7,993 for more distant relatives. For unrelated beneficiaries, including unmarried partners, there is no allowance. A 95% reduction is allowed against the main home (up to €122,606 per beneficiary) for close relatives, but only if they continue to own the property for the following 10 years.
Spanish wealth tax is payable by non-residents on Spanish assets and residents on their worldwide assets based on assets held at 31st December each year. The tax applies to your total net taxable wealth and is charged at scale rates over eight bands with the rates ranging from 0.2% for wealth valued at €167,129 and under to 2.5% for wealth valued at over €10,695,996.
The international clampdown on tax evasion received a significant boost with the introduction of the STD in 2005. Now even this is being reviewed and likely to be toughened following the exposure of banking clients in the tax haven of Liechtenstein.
Not paying your taxes is tax evasion and illegal. Paying your taxes in Spain can be cheaper than placing money offshore. If you already pay all your taxes in Spain it is quite possible you could lower your tax bill with appropriate planning. There are legitimate structures available whereby you can reduce the amount of Spanish tax that is due which can also lower the tax liability and hassle for your heirs. Talk to a qualified financial adviser to find out how paying Spanish tax could actually save you money.
Full story from www.blevinsfranksinternationa.com
